Some Economics of Wireless Communications [full text pdf]


Spectrum policy appears to be coming to a turning point. After half a century of criticism from economists, the FCC and Congress seem poised to undertake substantial reform of a system that almost all commentators criticize as outdated and inefficient. Two radical alternatives have emerged as major approaches towards reform. The first, more widely known, is the proposal to create a system of property rights in spectrum that would form the basis for a market in spectrum to replace the existing regulatory system. The second, less widely recognized, is the proposal to permit greater deployment of wireless equipment that relies neither on a license nor on a property right. This open wireless network approach—often called “spectrum commons” or “open spectrum”—aims to provide a space for a market in intelligent end user equipment, rather than a market in infrastructure rights.

This article provides an economic analysis of wireless communications that offers a framework for evaluating the relative desirability of the two proposed alternatives. First, it provides a concise description of the technological changes that have made open wireless networks a feasible alternative to licensing and spectrum property. Second, it offers a new way of describing the social cost of wireless communications that enables one to specify more precisely the tradeoff between property rights in spectrum and open wireless networks. I explain why spectrum property based systems will have systematically lower capacity than open wireless networks, and will grow capacity more slowly. This implies that they will only be more efficient, if at all, where the value of the communications they do clear is sufficiently larger than the value of the larger number of communications that an open wireless network would have cleared without sensitivity to their value. The real cost of a wireless communications is, however, highly variable, local, and dynamically changing, making efficient pricing of spectrum property relatively costly, and hence, potentially, imperfect. To the extent that pricing is indeed imperfect, its utilization is unlikely to offer a substantial advantage over value-insensitive open wireless networks. The article then briefly explains the advantages of open wireless networks in terms of innovation, consumer welfare, and security.

My conclusion is that open wireless networks are likely to be better at optimizing the ability of users to communicate without wires than could spectrum property based systems. Our relative lack of actual experience with either open wireless networks or spectrum property-based systems suggests, however, that it is too early to recommend a wholesale transition to one new approach or the other on the basis of this qualitative conclusion. Instead, the last part of the article proposes a series of regulatory moves that could permit the emergence of a long-term and large scale market test of the two alternatives, a test that within a few years could provide us with substantial practical experience to help answer the question of whether the optimal approach would be to adopt spectrum property based systems, open wireless systems, or some combination of the two approaches.